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CPMS ferrets out the unpredictable Add to ...

WHAT ARE WE LOOKING FOR? Yesterday, we discussed the screen for Predictable Growth stocks, developed by CPMS Computerized Portfolio Management Services Inc. The independent investment-data provider uses a series of criteria to identify stocks that display characteristics that portend reliable, predictable earnings growth. CPMS's Predictable Growth model portfolio has generated average returns of 16.6 per cent since 1985, compared with 9.9 per cent for the S&P/TSX composite index on a total-return basis. If you had invested $10,000 in the model portfolio at the end of 1985, you'd have more than $300,000 today (versus a much less impressive $78,000 if you'd invested in the TSX composite). The flipside of this, of course, are stocks that utterly lack predictable earnings growth - something the wise long-term investor would want to avoid. We turn to CPMS again today to ferret out these names. THE UNPREDICTABLE GROWTH MODEL CPMS recently developed a model portfolio of stocks that scored the lowest on their Predictable Growth criteria, dubbing it the Unpredictable Growth model. Flipping the Predictable Growth screening criteria on their ear, stocks rank high on the Unpredictable list if they display the following characteristics: -High price-to-earnings; -Low reinvestment rate; -High earnings variability (i.e. a lack of wild swings in quarterly profits); -High price-to-book value; -Low earnings growth over the past four quarters; -Downward revisions in earnings estimates over the past three months; -Negative surprises in quarterly earnings, compared with consensus expectations. (CPMS doesn't weight all these factors equally, but for proprietary reasons, it doesn't disclose its weightings to non-clients.) THE RESULTS The Unpredictable Growth model portfolio performed dreadfully in a historical back-test, averaging a decline of 11 per cent a year since 1985. If you had invested $10,000 in the Unpredictable portfolio at the end of 1985, you'd have just $700 left today. CPMS used the same methodology to screen for the weakest stocks on the predictability scale in the current Canadian market - the Unpredictable Growth screen list, included here. The 25 stocks on the list generated a loss of 18.9 per cent on a total return basis, for the year to date - compared with positive total returns of 9.4 per cent for the S&P/TSX composite and 14 per cent for the top-25 stocks in the Predictable Growth screen.

 

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